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4 Ways You Might Be Hurting Your Credit Score (and What to Do About It)

May 9, 2013
Credit Score, Personal Finance
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This guest post comes from Michael Delgado, the Social Media Community Manager at Experian.

He works to promote financial literacy on Experian social channels and  writes for the Experian blog. He can be found on Twitter @mikedelgado.

Nobody is exempt from making a credit mistake.

Just last month, I forgot about a bill for an old credit card that I rarely use. Yep, I’m the guy sharing articles on social networks about ways to improve credit — and I forgot to pay a credit card bill on time.

Thankfully, my wife caught my mistake early and we got the bill paid one day late. And, thanks to ideas and articles by Ramit Sethi, I was able to get the $15 late fee waived a few days later.

I called the credit card company the moment I found out the bill was late to see if my late payment would be reported to the credit bureaus. I was relieved to find out the company has a 60-day grace period before reporting late payments to Experian, TransUnion and Equifax.

I’m happy that my credit history is unharmed, but embarrassed about missing a simple payment. All of this has me thinking about other credit mistakes I could be making.

Here are four common ways we can damage our credit (and what we can do about them):

1. Not paying attention to your credit utilization rate

“Your credit scores are impacted by the amount of debt you owe on your credit cards in comparison to the credit limit you have on those cards. This is referred to as your credit utilization rate, which makes up roughly 30% of your credit score,” says Maxine Sweet, vice president of public education at Experian. The higher your credit utilization, the more likely your credit scores will suffer — simply because it signals too much debt with not much open credit to carry you through an emergency.

To calculate your credit utilization rate, simply divide your credit card debt by your credit card limit and then multiply by 100.  For example, if you owe $4,000 on a credit card and have a credit limit of $10,000, you would have a 40% utilization rate. Your debt is the amount showing as your balance on your statement, even if you plan to pay it in full.

To ensure you’re not hurting your credit scores, you want to make sure your total credit utilization rate is under 30% when you total the balances and limits on all of your revolving credit accounts. The lower your credit utilization rate, the better off you’ll be.

2. Forgetting to pay or not paying debts as agreed

It’s easy to forget to pay a credit card bill on time, especially when life gets busy. However, missed payments that get reported to credit bureaus can really hurt your credit scores. “Your payment history makes up about 35% of your credit scores, which is why missed payments can have such a severe impact,” Sweet says.

Missed payments mean that you’re not paying a lender as promised. It also means not only is it risky to let you use their money, it’s also expensive because lenders have to pay the merchants before they receive your money. That’s why it’s crucial that you track of all your revolving credit lines and ensure that any owed money is paid monthly.

And don’t forget to check the credit card statements on ones you don’t use much (like I did). You never know when a charge might appear.

Get in the habit of checking all of your bills and setting reminders on your phone or online calendar so you always know when bills are due. And if you ever miss a payment, call your lender right away to let them know what happened. Many times, credit card companies don’t report missed payments until 30 days after the due date.

3. Closing down old credit cards with great credit history

I know you might be tempted to close your oldest credit cards because you don’t use them anymore, but those credit cards could be benefiting your credit scores a lot. They provide data on how long you’ve been using credit — and how often you paid your bills on time. Open credit accounts with no balance can also help your overall utilization ratio.

“A closed account will not score as positively as an open account because you are no longer demonstrating management of that credit line. And, your credit history on that card will get deleted after 10 years. Both of which could have a negative impact on your scores,” Sweet says. It’s best to keep that card active, and continue to benefit from the credit history on your old cards.

4. Not auditing your credit reports throughout the year

We need to keep watch on our credit reports to make sure lenders are reporting accurate information.

Credit bureaus like Experian, TransUnion and Equifax provide the service of collecting, storing and updating credit account data reported by lenders so that your credit references are instantly available when you need them. Most of the time, data reported is accurate — but mistakes can happen and fraud can happen. This is why we need to regularly check our credit files to make sure all accounts are accurate and no fraudulent accounts have been opened in our names.

“You can get your free credit report from each credit bureau once a year through AnnualCreditReport.com or by calling 1-877-322-8228,” Sweet says. This means you can rotate your requests and pull one credit report every four months to keep tabs on how your accounts are being reported.

And if you spot any inaccurate information, you can use the credit dispute apps for the credit report that you reviewed: Experian, Equifax or TransUnion. If your lender responds with a correction, that lender will also automatically notify the other companies it reports data to and all of your reports will be corrected.